Monday, Dec. 08, 2003 Will Wal-Mart Steal Christmas? As the retail king slashes prices on toys, its rivals are dreaming up new ways to compete By DAREN FONDA They may not realize it, but the good folks of Fond du Lac, Wis., are participating in a high-stakes shopping experiment courtesy of Toys "R" Us. The $11 billion toy chain selected this lakeside resort town surrounded by dairy farms to test a radical departure from its traditional Toys "R" Us stores, which typically feature row upon row of shelves crammed with toys and little else. The new shop, Geoffrey, named for the company's mascot giraffe, is a multihued, airy warehouse that's part playpen, part kids' mall and part toy store. Accompanied by the sound of peppy music, children carouse on the store's indoor jungle gym, do arts and crafts in a supervised area and play free video and arcade games. The store also sells toys, apparel and baby furniture, hosts parties, offers haircuts, takes kids' photos and runs summer activities like water-pistol fights.

Geoffrey may seem like an extravagant, larky enterprise dreamed up by Willy Wonka, but Toys "R" Us badly needs it to work if the firm is to break out of its deep slump. Wal-Mart and other big discount chains like Target have eroded the company's sales in recent years, and now it looks as if Wal-Mart is circling for the kill, escalating a price war that may eat up whatever profit margin Toys "R" Us has left. Despite rising consumer confidence and blistering U.S. economic growth of 8.2% in the third quarter, analysts expect sales at Toys "R" Us to drop from $7 billion in 2000 to $6.5 billion this year. And the company dealt investors a yuletide lump of coal when it announced that it had lost $38 million in the third quarter and was closing all its 146 Kids "R" Us stores plus 36 Imaginarium smart-toy stores, both of which were bleeding cash. Toys "R" Us stock now hovers around $11.75, down from a peak of nearly $43 in 1993.

Should Geoffrey catch on, it would bolster the conviction of Toys "R" Us CEO John Eyler that it's still possible to combat the low-cost threat posed by Wal-Mart and Target. Geoffrey "is potentially a $1.5 billion business," he says. "The Geoffrey stores are flat-out fun  and it's not clear if going to Wal-Mart or Target is fun." So far, the concept seems to be working. Since Geoffrey opened 14 months ago, Wisconsinites appear to have embraced it, showing up in large numbers and steadily boosting sales, the firm says. Maintenance technician Lonnie Roeder, 34, goes twice a week with his daughter Savanna, 4, mainly to play, although on occasion he buys something. "We come so she can have fun," he says. The company is testing the concept in three other locales  Abilene, Texas; Jacksonville, N.C.; and Meridian, Miss.--and Eyler says he may open four to six more Geoffrey stores next year.

Putting the fun back in toy shopping  not least as a way of enticing customers to stores all year round  is critical if Toys "R" Us is to survive the toy wars, which look particularly brutal this season. In late September, Wal-Mart lobbed an ominous warning shot by discounting a basket of popular toys several weeks earlier than in past years. "We're going to be the low-price leader, and that will include holiday toys," declares Wal-Mart spokeswoman Karen Burk. To its rivals, the depth of its price cuts has come as a shock. The company put the popular Hokey Pokey Elmo on sale at $19.46, 30% less than the list price and reportedly below even the wholesale cost. "Did it catch us by surprise? Yeah," Eyler admits. Still, he adds, since early November "we've been price competitive." That's good news for consumers, the prime beneficiaries of such skirmishing. Target last week reduced the price of its Bratz disco-doll set from $100 to $65, challenging rivals to follow suit. Wal-Mart matched the price, while Toys "R" Us sells the set for $100 in stores and $80 on Amazon.com, its online partner.

As successful mass merchandisers, Wal-Mart and Target can more easily afford a price war than Toys "R" Us and other toy specialists. Wal-Mart's sales of high-margin items like flat-screen TVs can make up for losses on low-margin toys. It's a classic loss-leader attack. Wal-Mart figures that supercheap toys will lure customers to the store, where they might buy pricier items. That puts the squeeze on toy specialists, which must either follow suit and risk losses or try to hold their prices and bet that their superior customer service and selection will enable them to compete.

Some analysts say because Wal-Mart started discounting so early and so deeply, it may already be experiencing shortages. A pre-Thanksgiving survey of several Wal-Mart stores, conducted by investment firm Harris Nesbitt Gerard, showed the retailer has been "chronically out of key items," including Bratz dolls, Hot Wheels TWrecks and Hulk Hands. Toys "R" Us, which has nearly matched Wal-Mart's prices on many of those hot items, has so far remained better stocked, though the crucial test will come in mid-December when last-minute shoppers scramble to find the toy their kid must have.

Longer term, there's little question that Wal-Mart has gained an edge. Its share of the $25 billion traditional toy business has grown from 10.8% in 1993 to 21% today (and some analysts estimate it's more like 25%). Toys "R" Us, KB Toys and smaller toy chains, meanwhile, have either lost share, quit the business or struggled to hold ground. Says analyst Todd Kuhrt of Midwest Research, "It's clear that consumers are voting with their wallets for Wal-Mart and Target."

One potential casualty: FAO Schwarz. The upscale chain, whose flagship Fifth Avenue store in New York City was immortalized by Tom Hanks in Big, has been losing sales to big-box retailers all year, and the chain is said to be facing a cash crunch heading into the holiday season. Parent company FAO Inc. is in default on its lending terms, creditors have signaled that they won't provide more loans, and analysts say the firm may seek bankruptcy protection before Christmas. That would mark a dismal end for FAO Inc., whose holdings include the Zany Brainy and Right Start chains. The firm emerged only in April from a previous stint under bankruptcy protection.

The trouble is FAO's high-end focus no longer appears to be paying off. "FAO's pricing is out of line," carps Ken Kasarjian, who was checking out the goods at a Toys "R" Us store in Manhattan's Times Square last week with his twin 9-year-old sons. But Kasarjian was not particularly impressed with the prices at Toys "R" Us either. For now, he's planning to place some orders online and buy some other toys at Wal-Mart. His shopping habits aren't unusual, and that's troubling for toy retailers, who must compete for business with not just Wal-Mart but also drugstores, discount Web sellers and auction sites like eBay.

Still, Eyler isn't about to admit defeat. Since the former FAO chief executive took the helm in 2000, he has aggressively restructured Toys "R" Us. He shuttered dozens of stores, consolidated support centers and freshened up the company image with a remodeling of 75% of its 680 flagship shops. The firm spent millions to improve customer service. It cut inventory from 14,000 to 9,000 items to focus on more profitable lines. And in a bid to differentiate its wares from Wal-Mart's  whose selection is limited despite expansions of toy shelf space around the holidays  it bolstered its exclusive merchandise and brands, adding lines like Animal Alley stuffed animals and Super Slicks radio-controlled cars. Selling more of its own brands should enable Toys "R" Us to cut costs because it can source the merchandise directly from contract factories in countries like China rather than buy from higher-priced manufacturers like Hasbro. Eyler says exclusive products account for 20% of the firm's merchandise mix, up from just 5% in 2000, and adds, "We will migrate it to 25% in the next few years."

Eyler also deserves credit for expanding in other areas. Revenues at Toys "R" Us shops overseas have risen 28% since 2000 and are expected to hit $2.4 billion this year. Meanwhile, the partnership with Amazon.com is on track to break even for the first time in 2004, after several years of losses. And sales at Babies "R" Us apparel stores are up 61% since 2000, to $1.8 billion.

But the real challenge for the company is to boost profitability in the face of relentless pricing pressure. Profit margins at Toys "R" Us stores fell from 5.7% in 1999 to just 3.2% this year, according to Jefferies & Co. Eyler knows he can't back down by letting the behemoths undercut his prices. "We won't allow [Wal-Mart] to distance itself," he vows. Geoffrey, he hopes, will prove that price isn't everything, that shoppers will warm to the charms of brightly colored jungle gyms and playpens. And he can take comfort in this: you can't find those services at Wal-Mart. Yet.

People should not shop at WalMart, period. Once they drive out all competition, look out. Now we see that not only are they impacting food stores, hardware stores, now we see they are trying to drive toys R Us out of business.

What's funniest about this article, however, is the decription of Fond du lac as a 'lakeside resort town'. NOT.

If toys R us and other stores like it is to stay in business they will have to forget about maintaining profit margins through high prices. They got to start thinking of maintaining profit margins by moving large volumes of stuff not by a price ratio. My guess will be toy R us will be history soon. Gimmicks just won't cut it. Just Low prices, not discount cards. double coupon days etc. Low prices is what will keep you in business.

I still don't see how they can advertise that the cards "never expire" - mine surely did!

Well, it's just another one of the frauds that they perpetrate on unwitting customers. So long as the amount that they take from each victim is relatively small, they gamble that they can slide under the radar and avoid prosecution.

So long as the amount that they take from each victim is relatively small, they gamble that they can slide under the radar and avoid prosecution.

I'm no longer shopping there, and you can be sure that this year my 16 nieces and nephews will NOT receive the Walmart gift cards I usually give them. I think gift cards from a bookstore will probably be better for them anyway.

Several friends have told me that Walmart will never notice my boycott, which I'm sure is true...but it makes me feel better.

20
posted on 11/30/2003 6:05:37 PM PST
by Amelia
("We have met the enemy and he is us." -- Pogo)

I'm no longer shopping there, and you can be sure that this year my 16 nieces and nephews will NOT receive the Walmart gift cards I usually give them. I think gift cards from a bookstore will probably be better for them anyway.

Several friends have told me that Walmart will never notice my boycott, which I'm sure is true...but it makes me feel better.

Good for you, Amelia. America will be a better place for your decision. ;-)

Toys R Us needs to get its act together. Last Christmas I went looking for a set of "Rook" card. Toys R Us not only didn't have it but they also told me that they couldn't get it for me. I finally found it at Wal-Mart.

I put up with awful service for cheap prices but I am not putting up with awful service for high prices.

23
posted on 11/30/2003 6:14:33 PM PST
by Harmless Teddy Bear
(I shot an arrow in the air. / Where it falls I do not care. / I buy my arrows wholesale)

The big print says they never expire. The fine print says that after 24 months, they take out $1 per month as a "handling fee."

I bought several gift cards in relatively small amounts - $10-$15 - as gifts for the nieces and nephews several years ago. Before I'd given them all away, we moved, twice. It's a long story, but much of our "stuff" stayed in storage longer than we'd anticipated, and the gift cards ended up among the things in storage.

When I found them again, they were worthless, and Walmart refuses to refund the balance that should be on them, even though they have gotten the use of the money on the cards for over three years now.

28
posted on 11/30/2003 6:25:12 PM PST
by Amelia
("We have met the enemy and he is us." -- Pogo)

I remember 20 years ago when my kids were little, and TRU used to be the "discount" store. Now, its not anymore. What's the big difference between them, Target, and Wally's World? They all get toys that are practically 100% made by slave labor in Communist China. You have to go to a mom-and-pop toy store (if you can find one, good luck coming up with one in suburbia) to find toys that are made by people with our values.

But, in historical context, ToysRUs ran the traditional, mall based old-line department stores out of the toy business a few years ago. They were, at that time, considered a category killer. Once they drove out the competition, they got fat and lazy. If WalMart does the same, new competition will be generated.

When they were coming up with names for this venture I would hope they ventured outside their own experience. "Geoffrey" seems like an obvious choice, but the while the character was once warm and cuddly - a cartoon rendering - his latest incarnation is a 'realistic' 3D or live action creature that's frankly sort of frightening.

The Geoffrey brand is recognizable but it's blurry in the marketplace. How can they make 'Geoffrey' a destination it's indistinct and leans toward 'scary' (my kids' definition)

Equally troubling in conjunction with this 'icon' is their attempt to run a high-overhead store in an era of cost-cutting.

Sure, it's a great idea and it works in Fondue, Wisconsin, but where I live there's a ton of more 'legitimate' culture than there is in that BFE town.

I'd give it two weeks here.

39
posted on 11/30/2003 9:54:38 PM PST
by IncPen
( I hope the Democrats keep listening to the Clintons. So far, it's been great for us.)

I think gift cards from a bookstore will probably be better for them anyway.

Better not get them from Barnes & Noble because although it doesnt say it on the card - they expire too, on a sliding scale. A $25 face value may only be worth half that in 6 months time. Within a year or so they are without any value.

There are still K-Bee toy stores in malls. Those are the only ones I've ever seen. Don't get me wrong, I'm no fan of TRU, either, I just despise WalMart and what they are doing with cheap chinese goods to the American consumer.

I think Toys R Us is a horrible place for toys. I remember going in there looking for gift for my two sons and would walk about empty-handed almost every time. Nothing but cheap, plastic junk. And the aisles were so narrow and clogged that it was not fun even being in there.

I liked getting my sons things they could build with like erector sets and Legos and those "snap-on" things like "Konnex." One year I got a roller-coaster kit from Konnex that had about 5,000 pieces you had to snap together. That kept my son occupied for weeks. Never find that stuff at Toys R Us. I also got them a Lionel model train set that I had to go to a specialty store for. Forget about finding that in Toys R Us. But if you like getting your kids dart guns with foam darts that last about 20 minutes before they snap and break, or if you like getting your kids a remote controlled car that comes with a battery that lasts about an hour and then you have to stick it in the wall for 12 hours to charge again, then Toys R Us might be the place for you.

That's not true because I actually had this experience last Christmas: During Christmas 2001, I got a $50 Barnes & Noble gift card from a relative and I put it away with the Christmas cards and forgot about it. Last Christmas, as I pulled out the old Christmas cards (I save them so that I know who to send cards back to), the card fell into my lap. So a few days later, I used it and it was still worth $50. This had to be a full year since the relative first bought the card.

* Textiles and Apparel: Carolina Mills is a 75-year old Carolina company that supplies thread, yarn, and textile finishing to apparel-makers -- half of which supply Wal-Mart.

But since 2000, Carolina Mills' customers have begun to face imported clothing sold so cheaply to Wal-Mart that they could not compete even if they paid their workers nothing.

Since 2000, Carolina Mills has shrunk from 17 factories to 7, and from 2,600 employees to 1,200. Steve Dobbins, the CEO of Carolina Mills told the December issue of {Fast-Company} magazine that,

"People ask, `How can it be bad for things to come into the U.S. cheaply? How can it be bad to have a bargain at Wal-Mart?'

{But you can't buy anything if you're not employed. We are shopping ourselves out of jobs}." (emphasis added)

* Lovable Garments, which was founded in 1926, had, by the 1990s, become the sixth largest producer of women's bras and lingerie in the United States, employing 700 workers.

Wal-Mart became the biggest purchaser of Lovable's goods; in 1995, Wal-Mart demanded Lovable slash its prices to compete with cheap imports.

When Lovable indicated it could not do that, Wal-Mart illegally reneged on its contract with Lovable, and outsourced the lingerie production to Ibero-America, Asia, and China.

Without the Wal-Mart market, in 1998 Lovable had to close its American manufacturing facilities and fire the workers. Stated Frank Garson, who was then Lovable's president, "Their actions to pulverize people are unnecessary. Wal-Mart chewed us up and spit us out."

* Food: Vlasic Pickles. Although it may at first glance seem humorous, there is a serious lesson. Wal-Mart roped Vlasic into a contract in which Wal-Mart sold a 3 gallon jar of Vlasic whole pickles for $2.97. Wal-Mart sold 240,000 gallons of pickles per week.

But the price of the 3 gallon jar was so low, that it vastly undercut Vlasic's sales of 8 ounce and 16 ounce jars of cut pickles; further, Vlasic only made a few pennies per 3 gallon jar.

Its profits were tumbling. Vlasic asked Wal-Mart for the right to raise the price per 3 gallon jar to $3.49, and according to a Vlasic executive, Wal-Mart threatened that if Vlasic tried to back out of this feature of the contract, Wal-Mart would cease carrying any Vlasic product. Eventually, a Wal-Mart executive said, "Well, we've done to pickles what we did to orange juice. We've killed it," meaning it had wiped out competitor products. Finally, it allowed Vlasic to raise prices. But in January 2001, Vlasic filed for bankruptcy.

Wal-Mart forced the price of Huffy Bicycles, which is the third largest bicycle maker in the U.S., so low, that today 98% of Huffy's bicycles are imported from overseas.

Today's London {Observer} carries an article that focusses on the destruction of the City of Buffalo, New York, mentioning the role of Wal-Mart.

Buffalo had been a premier U.S. city: it was the first city to have widespread residential lighting, and was a center of heavy industry.

But Buffalo's Bethlehem Steel plant, which once employed 22,000 workers, is virtually empty; its unemployment rate is officially 10.2% (and in reality closer to 17%-18%); its population has shrunk in size by 40% since 1970; and the city is bankrupt and under the direction of a control board.

The article tells the story of Buffalo Color, a manufacturing plant where indigo dye for denim was produced. Once employing 3,000 workers on its 63-acre site, Buffalo Color lost business to plants established in China, which produce the indigo dye at half the cost that Buffalo Color does.

Although the article's author David Teather does not draw it out, the indigo dye dyes denim, most of which is used in clothing, and Wal-Mart has driven down the price it will pay for clothing, and thus all its constituent ingredients must be cheaper.

Buffalo Color now employs 12 people, and functions strictly as a resale operation.

The article concludes by reporting on the Made in the USA group, which consists of many small- and medium-sized manufacturers, whose chairman states that its primary enemy, which causes destruction, is Wal-Mart.

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